Efficiency and Market Power Gains in Bank Megamergers: Evidence from Value Line Forecasts

Financial Management, Forthcoming

Posted: 21 May 2016

See all articles by Erik Devos

Erik Devos

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance

Srinivasan Krishnamurthy

North Carolina State University - Poole College of Management

Rajesh Narayanan

Louisiana State University

Date Written: May 1, 2016

Abstract

This paper examines whether gains in bank megamergers occur due to efficiency improvements or the exercise of market power using financial statement line item forecasts from Value Line to infer the effect of the merger on prices and quantities. The average megamerger is associated with cost-efficiency improvements. In the cross-section, efficiency gains are limited to market expansion mergers while market overlap mergers and Too-Big-To-Fail (TBTF) mergers exhibit monopoly gains. Efficiency gains dissipate when the resulting megabank size exceeds $150 billion in assets or 1.5% of GDP indicating that banks thought to be TBTF are likely to be “Too-Big-To-Be-Efficient” (TBTE).

Keywords: Bank mergers; Efficiency gains; Market power; Too-Big-To-Fail

JEL Classification: D4, G21, G34

Suggested Citation

Devos, Erik and Krishnamurthy, Srinivasan and Narayanan, Rajesh, Efficiency and Market Power Gains in Bank Megamergers: Evidence from Value Line Forecasts (May 1, 2016). Financial Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2781687

Erik Devos

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance ( email )

500 W. University Ave.
El Paso, TX 79968
United States
915 747 7770 (Phone)

HOME PAGE: http://utminers/utep.edu/hdevos

Srinivasan Krishnamurthy (Contact Author)

North Carolina State University - Poole College of Management ( email )

Hillsborough Street
Raleigh, NC 27695-8614
United States

Rajesh Narayanan

Louisiana State University ( email )

Baton Rouge, LA 70803-6308
United States
225-578-6236 (Phone)

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